LLP vs. LLC (Which is better?)

If you are starting a professional services business with one or more partners, you may be deciding between a Limited Liability Partnership (LLP) and a Limited Liability Company (LLC). Both offer liability protection, but they are designed for different types of businesses. This guide explains the key differences so you can choose the right structure.

LLP vs LLC: Quick Comparison

What Is an LLP?

A Limited Liability Partnership (LLP) is a business structure designed primarily for licensed professionals who want to work together as partners. In an LLP, each partner is protected from liability caused by the negligence or malpractice of the other partners. If one partner makes a professional mistake or is sued for malpractice, the other partners’ personal assets are generally protected from that claim.

However, LLP protection has an important limit: each partner remains personally liable for their own negligence and malpractice. The LLP structure only protects you from what your partners do, not from what you do. Partners are also typically liable for general business debts like rent and loans, depending on the state.

LLPs are not available in every state, and many states restrict them to licensed professionals such as lawyers, accountants, doctors, and architects. You form an LLP by filing a statement of qualification or registration with your state. An LLP must have at least two partners. There is no single-owner LLP option.

What Is an LLC?

A Limited Liability Company (LLC) is a flexible business structure available in all 50 states. It provides full liability protection to all of its owners (called members). Members are not personally liable for business debts, lawsuits, or the actions of other members. An LLC can have one member or many members.

LLCs can be used for virtually any type of business, from freelancing to real estate investing to retail stores. The LLC is governed by an operating agreement, and members have flexibility in how they structure management and profit distribution. By default, LLCs have pass-through taxation, but they can also elect to be taxed as an S-Corp or C-Corp.

To learn more about LLC formation and benefits, see our guide to what an LLC is.

Key Differences Between an LLP and an LLC

Liability Protection

This is the most important difference. An LLC provides full liability protection to all members. Personal assets are shielded from all business debts and liabilities, regardless of what another member does. An LLP provides partial liability protection. Partners are protected from the malpractice and negligence of other partners, but each partner is still personally liable for their own professional mistakes.

For example, if you are a partner in an LLP law firm and another partner commits legal malpractice, your personal assets are generally protected from that claim. But if you are the one who committed the malpractice, your personal assets could be at risk. In an LLC, the structure itself provides a shield regardless of which member was involved.

Taxes

Both LLPs and multi-member LLCs are taxed as partnerships by default. Profits pass through to the partners’ or members’ personal tax returns, and each owner pays income tax and self-employment tax on their share. Neither structure pays entity-level federal income tax.

LLCs have more tax flexibility. An LLC can elect to be taxed as an S-Corporation (by filing IRS Form 2553) or as a C-Corporation (by filing IRS Form 8832). This can provide tax advantages depending on the situation. LLPs are generally limited to partnership taxation and do not have these additional options.

Management and Operations

In an LLP, all partners generally have equal management rights unless the partnership agreement specifies otherwise. Each partner can make decisions and bind the partnership. This is similar to how a general partnership works, but with added liability protection.

An LLC offers more management flexibility. It can be member-managed (where all members participate in decisions) or manager-managed (where designated managers run the business while other members are passive investors). This makes the LLC a more versatile structure for businesses with different types of owners.

Formation and Costs

To form an LLP, you typically file a statement of qualification or a certificate of limited liability partnership with your state. Filing fees vary but are generally $50-$200. Some states also require LLPs to carry professional liability insurance or maintain a surety bond.

To form an LLC, you file articles of organization with your state. Filing fees range from $50 to $500 depending on the state. LLCs generally do not have insurance requirements as a condition of formation, though insurance is always recommended.

Ongoing Compliance

LLPs must renew their registration annually in most states. If the renewal is not filed, the LLP can lose its limited liability status and revert to a general partnership, where all partners have unlimited personal liability. This is a significant risk if the renewal is overlooked.

LLCs must file an annual report in most states and pay a fee. If the report is not filed, the state may administratively dissolve the LLC. However, most states provide a cure period to fix this, and reinstatement is usually possible.

When to Choose an LLP

An LLP may be the right choice in these situations:

• You are a licensed professional (lawyer, accountant, architect, doctor) forming a practice with other professionals.
• Your state requires professionals in your field to form an LLP rather than an LLC.
• You and your partners want a partnership structure with protection from each other’s malpractice.
• You are joining an existing firm that is already structured as an LLP.
• Your state allows LLPs for your profession and you are comfortable with partial liability protection.

When to Choose an LLC

An LLC is the better choice in these situations:

• You are starting a business alone (single-member LLC).
• You want full liability protection from all business debts and liabilities, not just malpractice by partners.
• Your business is not a licensed professional service.
• You want flexibility to choose how the business is taxed (partnership, S-Corp, or C-Corp).
• You want a structure that is available in all 50 states with consistent rules.
• You want manager-managed or member-managed options for how the business is run.

Frequently Asked Questions

Can one person form an LLP?

No. An LLP requires at least two partners. If you are the sole owner of your business, an LLP is not an option. You would need to form an LLC or a sole proprietorship instead.

Are LLPs available in every state?

LLPs are recognized in most states, but the rules vary significantly. Some states allow LLPs for any type of business, while others restrict them to licensed professionals like lawyers and accountants. A few states do not allow LLPs at all. Check your state’s rules before deciding on this structure.

Does an LLP protect me from my own malpractice?

No. An LLP protects you from the malpractice and negligence of your other partners. You are still personally liable for your own professional mistakes. This is a key difference from an LLC, which provides a broader liability shield.

Can an LLP be converted to an LLC?

Yes, in most states you can convert an LLP to an LLC by filing the appropriate conversion documents. The process and fees vary by state. This may make sense if you want broader liability protection or if your business is growing beyond professional services.

Which is better for a law firm, an LLP or an LLC?

It depends on your state. Some states require law firms to be structured as LLPs or Professional Limited Liability Companies (PLLCs). In states where both are allowed, an LLC or PLLC may offer stronger liability protection. Consult with an attorney in your state for specific guidance.

Do LLPs and LLCs pay the same taxes?

When both have multiple owners, they are both taxed as partnerships by default, so the tax treatment is similar. However, LLCs have the option to elect S-Corp or C-Corp taxation, which LLPs generally do not. This gives LLCs more tax planning flexibility.

What happens if an LLP partner dies or leaves?

This depends on the partnership agreement. Without an agreement, the LLP may dissolve when a partner leaves or dies, depending on state law. A well-drafted partnership agreement should address what happens in these situations, including buyout terms and continuation of the business.